Pauling, John

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Port Sustainable Management:A Financial PerspectiveJohn D. Pauling, P.E., BCEE

Executive Management Conference: Leading Your Seaport to Prosperity

Tampa, FL May 2-6, 2011


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Outline

Overview of Financial Aspects of Sustainability Making the Business Case for Sustainability

An EcoNomics Approach

Case Studies Sustainable Port Management

Conclusion


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Overview of FinancialAspects of Sustainability


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Sustainability

A means of configuring humanactivity so that society, itsmembers, and its economies areable to meet their needs andexpress their greatest potential,while preserving biodiversity andnatural ecosystems in the very longterm

Easily put

Sustainability is about thinking andacting in the future tense

(Planning for the Future)


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Sustainable

Growth

EconomicObjectives

EnvironmentalObjectives

SocialObjectives

Planet People

HighestValue

Profit


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The leader business spectrum

Beginner

Understanding ofkey CR issues

Compliancesystems in place

Performer

Senior-level buy-in Vision of sustainable

future

Systems in place todelivery

Leader

CR a strategicopportunity

Sustainableinnovationacross business

Pioneer

Business modelrefocused to profitfrom sustainablevalue creation


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Making the Business Case for Sustainability


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How Sustainability Creates Value

Activity

Initiative

Decision

Turnover growth

Margin growth

Reduce capital

expenditure

Risk reduction

Duration of competitiveadvantage

Reduced cash tax rate

Reduced cost of capital

Calculations for thematerialcontributions tovalue

Additionalvalue

Createvalue

Identify materialcontribution todrivers of:

Calculate specificfinancialcontributions

Combine togive additionto value

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How Sustainability Creates Value (Contd)

Reduce capital expenditure Avoiding unnecessary demand for fixed assets

Duration of competitiveadvantage

Shaping the market to the companys

advantage

Attracting people Prompt action on emerging strategic issue

Enhanced access to key resources

Reduce cash tax rate Reduced payments to government

Reduced cost of capital Improved access to financial capital at lowerrates

Financial Drivers


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How Sustainability Creates Value (Contd)

Turnover growth Product differentiation New products

New customers / market share / reputation /brand equity

Innovation

Margin growth Eco-efficiency

Motivating and retaining people

Risk reduction Increased security and quality of supplychains Reduce regulatory risk

Reduced reputation risk

Maintain license to operate

Financial Drivers


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Why is the Business Case so Difficult?

Challenge Solution

There is no one size fits allbusiness case

Only try to find your companys business case

The societal case doesnt

automatically make a businesscase for all situations

Dont expect a business case to exist for future

things the company needs to do

People have led withresponsibility which feels like

compliance

Opportunity trumps responsibility: framesustainability as a way of unlocking opportunityfor the company now and in the long-term

The more you look, the more youfind

Plan to explore how to make sustainabilitycommercial, and how to keep improving your

companys business case Sustainability and finance

professionals speak differentlanguages

Frame the case for sustainability in terms yourfinance director will understand, ideally indrivers of shareholder value

The no business case, no

permission vicious cycle

Plan small steps to iteratively establish aprocess of permission and results


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Delivering Profitable Sustainability

Assessment

Quantifying sustainability Informing, decision-

making(DELT) Delivery

Embedding capabilities Delivering sustainable

projects

Strategy

Identifying opportunities

Helping forge new directions -advanced solar thermal initiative


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Implementation Strategies

See finding your business case as part of a wider change program.Who are the key stakeholders? Who can be your champion in the finance function?

What are your consistent key messages?

Go to the finance department with a safe pilot.Identify a decision/project which wont trigger defense routines and only needs a small

amount of resource to investigate.

Use the pilot to build credibility and awareness.Where possible, have the finance function do the analysis building their capacity

Demonstrate you are concerned with finding the business case, not only justifyingsustainability

Keep creating a permission and results cycle

Address larger and more important areas: key decisions and financial processes (i.e.capital expenditure)

Keep building capacity of key individuals along the way


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Port Development ProjectsEconomic Considerations

Longer Term Benefits

Lower Discount Rates

Lower Transportation Costs

Less Ship Delays

Direct/Indirect Sub Job Creation Induces/ Supporting Jobs


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An EcoNomics Approach


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New Broader, Longer-Term Perspectives

An EcoNomics approach broadens the perspective(decision window) out to the future to consider factorsbeyond budget and schedule.

Projects are future-proofed

Expanded Decision

Window

CurrentDecisionWindow

Now 30+ Years

$8/T $20/T $85/T cost of CO2 emissions$0.1/m3 $0.3/m3 $2/m3 cost of water $0.05/kWhr $0.20/kWhr $0.50/kWhr cost of power

Environment

Cost & Schedule

Society

Efficiency

ImpactReduction

Sustainability


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Monetizing External Costs, Benefits & Risks

Trade-offs: Risk and Value : Cost and Benefit

?

?

?

?


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EcoNomics Approach

An EcoNomics project alternatives assessment developsa comprehensive accounting of all benefit, cost, and risk bymonetizing ALL influencing factors

Key features:Analyzes both financial and non-financial costs, benefits, and risksthrough monetization

Process designed to support clients overall sustainability objectives

Built-in future-proofing so that client can see long-term effects of and

to project optionsDefensible results based on reliable, non-subjective methodologiesand data input

Improved ability to communicate value of action to all stakeholdersincluding regulators


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Principal of Full Economic Analysis

t

t

xpp

i

CCBBNPV

x

0 )1(

)()(

ap

xP = project (internal)

x = society andenvironment (External)


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Businessas Usual

Increasing Level of Action

Zero Impact

FullS

ocietalNetBenefit(NPV)

EnhancedCompliance

Optimal

Sustainability

Finding the Economic Optimum


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Hierarchy of Assessment Project Type

What level of assessment is appropriate? Comparison of options at which level?

Policy Objective Level

Approach Level

Technology Level


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Assessment Process

27/04/2011

CustomerInput

ESIA

Eng. CostEstimating

LCA

Risk Assessment

CBA

Sensitivity Analysis

DELT

EcoNomics Framing Workshop

Report PresentationDecision Making

Support

Communication


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ENA Example 2: Former MGP Site Remediation


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Decision - Making

What should I do at this site?

Most sustainable method of remediation and how muchshould I spend?

Nature and extent of contamination

Risk (Human Health, Controlled Waters, Resources, Environment,

Property)Regulations

Stakeholder views


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What Could We Do?

Possible Objectives:Eliminate Human Health RiskMake site fit for redevelopment Property Holder

Protect the Public Water Supply (PWS) by preventing verticalmigration Water Utility

Protect the River Environment AgencyRemediate the aquifer itself Environment Agency

Which one is best??


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Remedial Approach Options

R1: Treat water at Public Water Supply Well (PWS) Monitored Natural Attenuation (MNA)

P1: Hydraulic containment in bedrock (Agency + WCofavored)

P2: Hydraulic containment in gravel P1 and P2

S3: Excavation above WT, ex-situ treatment (PH favored)

S1: Partial excavation + In-Situ Chemical Oxidation

S2: Full excavation (with piling), ex-situ treatment (LocalGovernment favored)


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External Costs of Remediation

Intended Cx:GHG emissions during remediationExternal costs of road transport

Unintended Cx:Introduction of contaminant to bedrock via piling (putty chalk risk)


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CAPEX: Role in Decision Making


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Base Case Benefits

Benefit Category 20 Year Benefit ($m)

Property value increase 10.5

Neighborhood blight reduction 3.9 (77.5 x 5% BF)

Aquifer Protection 8.1

River Protection 2.8

TOTAL (Maximum) $ 25.3 m


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Base Case NPVs


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Sensitivity Analysis: DELT-2

Robust Optimal Solution


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Using EcoNomicsAssessment

Good for complex, high value issues Good when outside forces are pushing for expensive

solutions

Good for helping determine course of action when multiplestakeholders involved

Good when perspective is needed

Good when multiple risks and tradeoffs are evident

Sustainability issues important

Significant external assets at risk Regulatory or public scrutiny

Reputation issues

Decision-making challenge

Pauling, John

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